New Trade $WYNN: China Syndrome

by Dan February 5, 2014 3:33 pm • Commentary

Casino stocks had a rough opening on the heals of January sales in Macau that were well short of analysts expectations on a year or year basis, per Bloomberg:

Feb. 5 (Bloomberg) — Macau casino revenue rose 7% from a year earlier to 28.7b patacas, according to data published on the website of the city’s Gaming Inspection and Coordination Bureau.• Growth was in single-digit for the first time since Jan. 2013

Despite a very weak opening, WYNN resorts has spent most of the trading session working out of its 5% opening gap and now is only down less than 2% on the day.

Just last week WYNN reported Macau sales that were up 25% year over year in Q4, but does the January increase across the entire locale of just 7% suggest the current period could see substantial deceleration?

From where I am sitting the stock is priced to perfection trading at 25x this years expected earnings that are only supposed to grow 7% year over year on sales growth of the same.  Following last weeks results that had the stock make a new all time high, the stock sat almost 100% above the 52 week lows made last February, I think it is safe to say that a just a bit of good news is priced in at current levels.  

From a technical standpoint, the stock is widely extended and might have just made a fairly epic double top. The one year chart below shows this and the pick up in volume of late could signal a sort of last gasp for the bulls:

[caption id="attachment_35894" align="aligncenter" width="589"]WYNN 1 year chart from Bloomberg WYNN 1 year chart from Bloomberg[/caption]

In my mind there seems to be a fairly odd disconnect btwn the prevailing macro theme of weak growth in the emerging world, specifically China, and that of the prospects of companies like WYNN who rely a great deal on the Chinese consumer for their sales and almost all future growth.

The Shanghai composite has been closed all week for the Lunar New Year and is expected to open again on Friday, my sense is that this will be met with selling and stocks like WYNN could be down in sympathy.

With the stock obviously a tad resilient I am going to leg into this trade and start small, and look to add if the stock gets back up towards last weeks highs.

TRADE – Buy the WYNN ($210) March 207/185 put spread for 6.50

– Buy 1 March 207 put for 8.70

– Sell 1 March 185 put at 2.20

Break-evens on March Expiration:

Losses: of up to 6.50 from 200.50 and higher with max loss of 6.50 above 207

Profits:   up to 15.60 btwn 200.50 and 185 with max gain of 15.50 at 185 or lower.